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Analysts see Christmas rally firming

Nicki Bourlioufas  |  09 Nov 2020Text size  Decrease  Increase  |  
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There are seasonal patterns in the markets and one of the most consistent is the “Christmas rally”. Believe it or not, there is good chance that a rally will emerge this year, according to some analysts.

The Santa Claus or Christmas rally is traditionally triggered by several factors including optimism about the new year ahead and light volumes around the year’s end. While the effect isn’t evident every year, some analysts expect a Christmas rally, and that’s despite the COVID-19 pandemic reducing economic growth and weighing on share prices globally.

According to Shane Langham, a senior private wealth adviser with Sequoia Wealth Management and author of the Charting Wisdom share market report, the likelihood of a Christmas rally in the Australian market is high, at 82.5 per cent. 

“For the Santa Claus rally to set up the way it normally does, we need to see weakness into mid-November, which normally could come in the form of a poor reporting season and the banks going ex-dividend,” says Langham. 

“However, this year we have a hotly contested US election with the potential of an unknown result for weeks over this time. Then we would be in a position for the Santa Claus rally to run.

“Look for a late-November and/or a mid-December bottom to set up the Santa Claus rally into the New Year,” says Langham.

Looking at the past 40 years, most Santa Claus rallies started from late November (20th–30th) and this is followed by a mid-December (10th–20th) start date or acceleration point.

“These rallies have lasted on average 43 days and have ended 81.8 per cent of the time in the first two weeks of the New Year. Over this time the average gain has been 240 points or 8.8 per cent,” he says.

However, Langham urges caution. It would be hard for the market to rally without a clear-cut winner of the US election as this would delay the stimulus package (worth trillions of dollars) that both candidates have promised in a bid to reignite the US economy.

AMP Capital portfolio manager Dermot Ryan believes the chances of a December rally are “much higher than usual.” This is due to several factors, including huge amounts of fiscal spending in advanced economies, cheap domestically focused stocks, which are seeing revenues and profits increase, and confidence building in a cyclical upswing.

“It’s been a tough period for everyone,” Ryan says. “But companies and humans are nothing if not adaptive and the market is now tentatively climbing the wall of worry as the recovery begins.”

At the top of Ryan’s list of Christmas requests is a COVID-19 vaccine, and if one is delivered around this Christmas, “we are in for a very profitable 2021.”

Too many headwinds?

However, Drew Meredith, director of Wattle Partners, doesn’t expect an end-of-year rally.

“The ‘Santa Claus’ rally, as they put it, is being raised again after one of the most difficult years in generations. Do I think the market will rally as we head towards Christmas? There simply appears to be too many potential headwinds facing individual, and important sectors, to warrant a strong pre-Christmas rally.

“Given the market is weighted around 50 per cent to materials and financials we would need both of these sectors to perform strongly to see a Santa Claus market rally. Unfortunately, without a vaccine being approved I don’t think this is possible.

“The banking sector finds itself in an incredibly difficult position, albeit far stronger than predicted earlier this year. The RBA’s announcement of quantitative easing and a 0.1 per cent cash rate will place further pressure on the already shrinking net interest margins of these groups and force them to double down on residential mortgages if they want to keep growing profits.

“With a second [COVID-19] wave sweeping parts of the Northern Hemisphere and China continuing its aggressive stance against a number of Australian export industries, the economy may be under pressure once again as the year comes to a close,” says Meredith.

However, AMP Capital’s Ryan says government support to kickstart the economy with unprecedented amounts of spending, with a very pro-business Australian budget and fiscal spending overseas, is putting life back into share prices.

“While it has been a stop-start lockdown, we are now seeing revenues, profits and dividend growth spluttering back to life,” says Ryan.

“From a portfolio construction point of view you need to balance enough exposure to stocks that are generating reliable cash flows in this subdued environment like infrastructure and supermarkets while maintaining exposure to the beaten-up sectors like energy, gaming and tourism to gain when the reopening accelerates.”

Lower rates

Kanish Chugh, head of distribution at ETF Securities, also notes that lower interest rates will force yield investors into the equities market, which will support Australian share prices.

“International markets may be more mixed,”says Chugh. “European markets are likely to be subdued for some time with new waves of COVID-19 infections along with elevated risks of terrorist attacks. This pullback though does present an opportunity for investors to consider exposure to Europe.

“In the US, the election needs to be considered. Historically US markets respond positively post an election irrespective of the result; however, should the result be contested or drawn out, which last occurred in the 2000 Bush/Gore election, we may see continued volatility.”

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See also Morningstar Guide to International Investing

is a Morningstar contributor.

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